French Equity Research Articles

A common component of Fama and French factor variances

This is the first study that explicitly explores the risk of the Fama and French equity factors in terms of their realized variances. Our results show that realized factor variances exhibit strong power-law behavior. A striking commonality is that the power-law exponents are close to α ≈ 2 regardless of which factor variance is analyzed. Notably, our novel joint test designed to test Mandelbrot’s infinite variance hypothesis in the cross-section of realized factor variances shows that the null hypothesis of α = 1.9 cannot be rejected, which further corroborates the evidence that (a) there exist a common component governing factor variance risk, and (b) factor variance risk is statistically undefined. Further evidence derived from co-fractality analysis shows that (c) risk diversification appears to be very limited as factor variances tend to exhibit power-law behavior coincidently. We argue that our study has several theoretical and practical implications—especially due to the fact that factor investing reached $5 trillion in assets under management.

Trade fragmentation and volatility-of-volatility networks

We assess the impact of trade fragmentation in equity markets using volatility networks following the volatility-of-volatility (VoV) approach. VoV networks offer an original method for measuring and visualizing the common component of volatilities. We use topological distance and connectivity indicators describing their structure as alternative proxies of VoV. Further, we use panel tests to apply threshold effects regression models on French equity market data after the introduction of MiFID, both at portfolio level and asset level. We show that market fragmentation yields a reduction in VoV, corresponding to both a contraction of volatility networks and a change in their structure. This effect strengthens in the stabilizing fragmentation regime compared to the increased fragmentation regime. Since VoV has been shown to predict stock markets returns, this original finding is widely relevant to market operators, regulators and public authorities.

Service offering and level of activity of equity crowdfunding platforms

This article sets out to study the link between the services offered and the level of activity of the 57 platforms, which currently constitute the entire French equity crowdfunding market. All the services offered by these platforms are considered relevant since they contribute to increasing the level of activity in terms of both the number of campaigns and the amounts raised. These services send a signal to the platform’s community and help reduce not only information asymmetries in terms of the adverse selection of entrepreneurs (due diligence and e-voting) and potential investors (co-investment with BAs and VCs, entry ticket), but also moral hazard through governance mechanisms to manage shareholders (holding company and shareholders’ agreement).

Protection of crowdfunders: A typology of equity crowdfunding platforms through governance mechanisms

Are crowdfunders investors like any other? One may wonder whether governance mechanisms designed to protect the interests of shareholders will be attractive to crowdfunders. We developed an original database integrating all French equity crowdfunding platforms to propose a typology of platforms based on their governance mechanisms. We identify four categories of governance systems, going beyond the usual dichotomy. Finally, we examine platforms’ popularity and show that the crowd is attentive to the disciplinary mechanisms designed to force the manager to act in the shareholders’ interests.

Asymmetric ambiguity spillover among international equity markets

ABSTRACT We investigate the ambiguity spillover among international equity markets. We follow Brennan and Izhakian (2018) and develop monthly ambiguity measures using high-frequency trading data of equity indices. The ambiguity spillover demonstrates noticeable asymmetry. The US equity market is the largest ambiguity transmitter to the other markets, while the French equity market is the largest recipient. China has small ambiguity connectedness with the remaining markets. The risk, however, has similarly symmetric spillover effects among different markets.

Building a Centre of Capital Accumulation: A Study of the Institutional Emergence of the French Private Equity Sector (from the Early 1980s to 2017)

ABSTRACT This article describes a major shift in French capitalism: the emergence and development of the new private equity sector. It discusses the particularities involved in the construction of this capital accumulation centre in France, studying how an advantageous institutional arrangement was coproduced by fund managers, government and traditional industrial managers. As such, it takes an institutional approach focusing on the history of the rules that enable financial activities. This article’s empirical material takes the form of (hitherto untapped) archives from the professional association of French private equity funds covering the period from 1984 to 2017, 12 interviews with former presidents of the association and ten interviews with partners of large French private equity funds.

Accruals quality, financial constraints, and corporate cash holdings

PurposeThe purpose of this paper is to examine how information asymmetry driven by earnings quality affects corporate cash holdings. It also investigates the role that financial constraints play in this effect.Design/methodology/approachThe paper examines a large sample of 6,501 observations of 741 firms listed on Euronext Paris over the period 2000–2015. Earnings quality is computed using the Jones model performance-matched discretionary accruals developed by Kothari et al. (2005): the larger the absolute value of discretionary accruals, the lower the accruals quality.FindingsThe study finds that firms with poor accruals quality hold more cash and that cash holdings in firms of low reporting quality are higher under financial constraints. These results indicate that firms tend to increase their cash reserves in the presence of high information asymmetry which is notably driven by low accounting quality. The findings also suggest that information asymmetry associated with low reporting quality is greater when firms also have strong financial constraints. The study’s conclusions are consistent with the precautionary motive for cash holdings.Practical implicationsThe results would enhance practitioners’ awareness of the importance of accounting choices in the management of cash policies. It would also give researchers an incentive to further explore how these policies are influenced by the precautionary behavior of managers.Originality/valueThis paper is the first work to investigate the effect of accruals quality on corporate cash holdings in the French equity market, which typically has a poor information environment resulting in high information asymmetry. Moreover, the role of financial constraints in this effect has not yet been explored.

Industry-level determinants of the linkage between credit and stock markets

ABSTRACTThis paper examines the relationship between US credit default swaps (CDS) and stock returns on an industry-wide basis across a number of investment horizons, with particular focus on the major determinants of such a relationship. Wavelet analysis is first applied to extract the CDS–stock wavelet correlation for each US industry. Then, Bayesian Model Averaging is employed to identify the key driving factors of the industry CDS–stock wavelet correlations at short- and long-term horizons. The empirical results indicate that the wavelet correlations between the industry CDS and stock returns are primarily negative over time and across time scales. Moreover, the CDS–stock correlation at longer horizons exhibits a much more stable pattern than its counterpart at shorter time frames. The results also demonstrate that the volatility of US Treasury and stock markets, as measured by the MOVE and VIX indices, respectively, the volatility of volatility, as captured by the VVIX index, and US economic policy uncertainty, as measured by the EPU index, are the most robust determinants of the correlation between CDS and stock returns at shorter and longer horizons for most US industries. In contrast, the Fama–French systematic equity factors exhibit a practically negligible explanatory power on the CDS–stock link.

MIFID, French Equity Markets Fragmentation and Intraday Volatilities: A Network Analysis

MIFID, French Equity Markets Fragmentation and Intraday Volatilities: A Network Analysis

Mutual Fund Governance: Depositary Independence and Investor Protection

The main role of a depositary is to protect investors by providing safekeeping and monitoring services. In Europe in general and in France in particular, it is common for funds and their depositary belong to the same financial group. This ownership linkage between funds and their depositary can affect the effectiveness of the depositary services, and investors might not be well protected. Using a sample of 1,515 French equity funds designed for retail investors, I investigate the effects of the dependence of depositaries on investor protection by comparing performance, risk taking and fees between independent and dependent‐depositary funds. The results show that an independent depositary seems to approve more ‘fair’ fees than a dependent depositary. However, there is no significant difference in performance or in risk taking between these two types of funds. Nevertheless, retail investors seem to care about the independence of the depositary.

Testing the Tax-Loss Selling Explanation of the January Effect: Evidence from a 'Confiscatory' Tax Implemented in France in 1921

For almost a century, we document a significant January effect on the French equity market. We find strong evidences in favor of the tax-loss selling explanation for this phenomenon. Indeed, the January effect was insignificant before the introduction of a “confiscatory tax” on capital gains in 1921, and became strongly significant afterward. Moreover, the rate of taxation is statistically significant to explain the strength of the January effect over time. Studying individual stock returns, a DiffInDiff investigation shows that past losers, outperform past winners at the turn of the year but only after 1921, which reinforces further the tax-loss selling explanation of the January effect.

How did the French and Belgian Equity Markets React to their Domestic Terrorist Attacks?

This paper investigates the effects of domestic terrorist attacks on the stocks listed on French and Belgian stock exchanges. We use two asset pricing models (CAPM and Fama-French Five-Factor Model) to assess how abnormal returns have changed following the attacks. We also estimate short-term and long-term changes in systematic risk around the attacks. Our findings show that the French sectors experienced mixed reactions following the Charlie Hebdo attack and were moderately affected by other terrorist attacks (Paris and Nice). Furthermore, the results indicate that Belgian sectors were sensitive to Brussels terrorist attack in terms of both risk and return.

Does the equity premium puzzle persist during financial crisis? The case of the French equity market

This paper examines the effects of the financial crisis that began in 2008 on the equity premium of 6 French sector indices. Since the systematic risk coefficient beta remains the most common explanatory element of risk premium in most asset pricing models, we investigate the impact of the crisis on the time-varying beta of the six sector indices cited. We selected daily data from January 2003 to December 2012 and we applied the bivariate MA-GARCH model (BEKK) to estimate time-varying betas for the sector indices. The crisis was marked by increased volatility of the sector indices and the market. This rise in volatility led to an increase in the systematic risk coefficient during the crisis and first post-crisis period for all the major indices. The results are intuitive and corroborate findings in the empirical literature. The increase of the time-varying beta is considered by investors as an additional risk. Therefore, as expected, investors tend to increase their equity premiums to b ear the impact of financial crisis.

Are European Environmental Regulations Excessive?

This paper investigates the impact of announcements of European environmental regulations on the French equity market. Using event study methodology and asset pricing models, we assess whether announcements of stringent and lax policies affect returns of environmentally-friendly businesses and polluters. Additionally, we estimate the change in systematic risk following the new regulations and develop a test to check if these effects are excessive. According to the results, the French capital market is particularly sensitive to announcements made by the European Union Emission Trading System and furthermore environmental regulations are excessive in a relatively small proportion of firms.

A Comparison of Bank and Non-bank Funds in the French Market

The European mutual fund markets in general, and the French in particular, are dominated by banks that create and distribute 80% of their funds. Thus, investors can be “captive” and less sensitive to a fund’s performance, which can provide “market power” to the funds. This paper presents a comparison of the performance, fees and the investors’ performance sensitivity between bank and non-bank funds. Using a sample of French equity funds from January 1999 to April 2008, I observe that in the French market, bank funds underperform compared to non-bank funds. Further, clients of bank funds seem to be less sensitive to performance than investors of non-bank funds. However, there is no significant difference in fees between bank and non-bank funds. This paper is the first empirical study of this question for the French case, the biggest mutual fund market in Europe.

Can the information content of share repurchases improve the accuracy of equity premium predictions?

We adjust the dividend–price ratio for share repurchases and investigate whether predictive power can be improved when constructing forecasts of the UK and French equity premia. Regulations in the two largest European stock markets allow us to employ actual repurchase data in our predictive regressions. Hence, we are able to overcome problems associated with markets characterised by less stringent disclosure requirements, where investors might have to rely on proxies for measuring repurchase activity. We find that predictability does not improve either in a statistical or in an economically significant sense once actual share repurchases are considered. Furthermore, we employ a proxy measure of repurchases which can be easily constructed in international markets and demonstrate that its predictive content is not in line with that of the actual repurchase data.

Can the Information Content of Share Repurchases Improve Out-of-Sample Predictive Performance?

We adjust the dividend-price ratio for share repurchases and investigate whether predictive power can be improved when constructing forecasts of UK and French equity premia. Regulations in the two largest European stock markets allow us to employ actual repurchase data in our predictive regressions. Hence, we are able to overcome problems associated with markets characterised by less stringent disclosure requirements, where investors might have to rely on proxies for measuring repurchase activity. We find that predictability does not improve either in a statistical or in an economically significant sense once actual share repurchases are considered. Furthermore, we employ a proxy measure of repurchases which can be easily constructed in international markets and demonstrate that its predictive content is not in line with that of the actual repurchase data.

Hedging the Time-Varying Risk Exposures of Momentum Returns

Momentum returns have time-varying exposures to the three Fama and French equity risk factors. In particular factor loadings are higher when the factor returns during the ranking period are higher. In this study we look at momentum returns after hedging the time-varying exposures to the Fama and French factors. We find that specifically taking into account the conditional nature of the time-variation in factor loadings is the best way to hedge. The hedged momentum returns are higher, less risky, more stable over time and vary less over different market conditions. Determining momentum betas based on estimated individual stock betas leads to large systematic biases and hence is less effective in hedging.

The Financial Performance and Investment Style of French Ethical Funds

Following the literature about Socially Responsible Investment performance, the purpose of this paper is to study the investment style and the performance of French ethical funds from January 1994 to January 2007. The performance measurement aims to verify if an active management based on specific research of sustainability can add value with regard to the market from a retail investor perspective. The comparison of the ethical funds with their relevant Benchmark is performed through Jensen’s alpha. Results show a general but non- significant underperformance of the ethical funds. A common conservative attitude towards the market risk was also observed. The style analysis a la Fama and French confirms the existence of a small cap bias, already found in previous studies. However, no clear investment strategy, with regard to growth or value stocks, was observed. Finally, using Carhart model, we found that French equity ethical funds don’t have any particular Momentum strategy.

Institutional Herding in Stock Markets: Empirical Evidence from French Mutual Funds

Using the herding measures of Lakonishok, Shleifer and Vishny (1992) (LSV) and Frey, Herbst and Walter (2007) (FHW), we assess herding by French equity mutual funds between 1999 and 2005. We show that LSV herding amounts to 6.5% while FHW herding is about 2.5 times stronger. We observe that herding is stronger in small than in medium and large capitalization firms. Herding is also more severe among foreign than among UE-15 or French stocks. Moreover, French mutual funds are shown to partially use positive feedback strategies. Finally, we obtain that sell-herding have a destabilizing impact on stock prices.